Edited version of your written advice

Authorisation Number: 1051201927018

Date of advice: 12 April 2017

Ruling

Subject: Assessability of lump sum payment

Question

Is your Permanent Total Disability payment from your employer's group insurance policy assessable income?

Answer

No

This ruling applies for the following period

Year ended 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You were employed and began receiving medical treatment.

You were later diagnosed with a medical condition.

You were referred to medical specialists and lodged an insurance claim.

Your treating specialist completed a medical certificate included in your claim, stating that you had 0% capacity with regard to your own occupation, a similar, or any occupation.

Your employer had a group insurance policy which included in its coverage Total and Permanent Disability.

Your medical condition qualifies for a permanent total disability benefit as outlined in your employer's group life, income protection and permanent total disability plan.

Your claim was not contested.

Your claim was made and paid by the insurance policy, and was not through a superannuation policy.

You are also entitled to receive salary continuance payments.

The benefit is not designed to replace an existing income stream, but rather to compensate you for your specific illness, which may or may not lead to loss of future income earning capacity. The payment is akin to a compensation payment, and is received for the illness that you suffered.

The payment does not relate to any services performed by you.

The payment does not have an element of recurrence and regularity, nor was it expected prior to the event, as the medical occurrence causing the illness could not be predicted.

This specific benefit is in the nature of a specific illness and is payable without any waiting period, and is calculated and paid as a lump sum benefit equal to 5 times your annual remuneration. This does not take into account whether or not you continue to receive your salary continuance payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-15(1)

Income Tax Assessment Act 1997 Paragraph 118-37(1)(a)

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

In your case the lump sum payment was not earned by you as it does not directly relate to services performed. Rather the lump sum relates to the loss of critical abilities. The payment is also a one-off payment and thus does not have an element of recurrence or regularity. The payment was not expected.

The payment was not relied upon, as it does not take into account whether or not you continue to work, and/or receive your normal salary.

Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Amounts received in respect of personal injury/illness which is not for reimbursement of medical expenses, or direct compensation for loss of income will usually be capital in nature and are potentially taxable as statutory income under the capital gains tax provisions of the ITAA 1997.

Taxation Ruling TR 95/35 deals with the capital gains treatment of compensation receipts. The ruling advocates a 'look-through' approach, which identifies the most relevant asset to which the compensation amount is most directly related.

Paragraph 11 of TR 95/35 states that if an amount is not received in respect of an underlying asset, the amount relates to the disposal by the taxpayer of the right to seek compensation.

As the amount received by you is not in respect of any underlying asset, the whole of the settlement amount is treated as capital proceeds from a CGT event (CGT event C2) happening to your right to seek compensation.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made from a CGT event where the amount relates to compensation or damages received for any 'wrong, injury or illness you ... suffer in your occupation'. Therefore, any capital gain made from the CGT event happening to your right to seek compensation is disregarded under paragraph 118-37(1)(a) of the ITAA 1997. It is thus not statutory income.

Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the gross amount you were entitled to receive is included in your assessable income.